Finance includes all actions taken to help plan for short and long-term financing of a Water Fund. This includes actions such as financial planning, financial analyses, fundraising, and developing the business case for a Water Fund.
Why is this necessary?
To develop and implement the Water Fund’s model for financial sustainability, which is capable of financing and ensuring the ongoing operation (including implementation of selected interventions and execution of other related activities) of the Water Fund.
Guidance for Finance in this Toolbox occurs across the Water Funds Project Cycle. This overarching guidance can be generalized into the following categories:
A series of financial analyses must be undertaken to help scope the size of the problems that Water Fund will help address, the feasibility of the proposed interventions from a financial perspective, and cost-estimates for each phase of the project cycle
The cost-estimates derived from financial analyses will directly inform short and long-term planning for Water Fund development and operation. This planning includes full-cost accounting, such as the costs of operating the fund, implementing activities, engaging stakeholders, and so on.
The results of financial analyses and planning will support the identification of the different types of funding sources and mechanisms that should be pursued, a strategy for securing those funds, and connect funding sources to funding needs.
A Water Fund business case analysis compares the benefits that a Water Fund generates for a particular Water Fund supporter, with their investments in the Fund.
It's purpose is to assess for a specific investor – current or potential - whether their investment in the Water Fund is financially beneficial for them.
Long-term Financial Mechanism
Experience strongly argues for Water Funds to constitute a trust fund to mitigate cash flow risks, as well as to give certainty to water producers that the fund will be able to fulfill its multi-annual commitments and to strengthen its credibility by incorporating a transparent vehicle to administer resources. Even if the water fund becomes the recipient of constant flows from tariffs, rights or other sources, a trust fund may facilitate investment from other users. Although the trust fund or similar vehicle has benefits, there may be cases where local regulations make it difficult to create such a figure. For instance, most Water Funds in Brazil are built on a promise by the municipalities or basin councils to finance conservation actions. The governance structure is based on the decisions of the basin committees and resources come from appropriations of these committees.
within the 5 phases of the Water Fund Project Cycle:
Phase 1: Feasibility
The Feasibility Phase includes two 'checks' to test if a Water Fund is the right water security tool. First, a test of 'eligibility' is completed by quickly determining if there are water security challenges and a potential for a Water Fund to help. If yes, feasibility is then explored further by developing a deeper understanding of the situation and generally how a Water Fund could positively contribute to water security within the defined area.
The purpose of a Situation Analysis is to: (a) assess the feasibility of a Water Fund (by more deeply understanding the situation); and (b) generally determine how a Water Fund could positively contribute to water security within a defined area/region.
Prior to initiating the design of the Water Fund, several key actions should be taken to assure that sufficient resources and capacity exist to sustain the momentum behind the Water Fund and the completion of its design. This level of assurance can be achieved by securing formal commitments to advocate for and/or resource the design of the Water Fund, as well as the hiring of a Water Fund Director.
Phase 2: Design
The Design Phase is undertaken to develop the best solutions for the identified water security issues and to choose the appropriate water fund configuration which accounts for key technical issues, financial considerations, governance dimensions and strives for maximum impact.
A Water Fund Strategic Plan is created to establish a long term (5-year) plan that creates clarity, focus and a shared roadmap for implementing important strategic choices made by the leadership of a Water Fund.
The purpose of supporting interventions is to: 1) establish engagement plans per stakeholder category and high-level protocols for communications, 2) create a plan to secure resources (i.e., fundraising/financing), and 3) to develop a 5-year roadmap to track milestone progress toward the Water Fund goals.
To identify a long-term financial mechanism based on the value proposition of the Water Fund, which further broadens participant base and sources of finance.
Phase 3: Creation
The Creation Phase is undertaken to formalize and publicly launch the water fund.
Phase 4: Operation
The Operation Phase is undertaken to establish stability by developing and implementing a comprehensive work plan, which guides systematic execution of activities, measurement and evaluation, and communication of progress towards the goals of the water fund. These activities should be continuously improved through adaptive management, refinements, and innovation.
The Annual Operating Plan addresses key aspects related to operating the Water Fund, including technical matters, marketing and communication, stakeholder engagement, fundraising, administration of the Water Fund, quality assurance, adaptive management, innovation, and planning.
Phase 5: Maturity
The Maturity Phase is a determination that assures the long-term viability of the water fund to create significant and lasting impact that positively contributes to water security.